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TMI Blog2014 (12) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... ailash Auto Finance Ltd. and Kailash Moser Industries Pvt. Ltd. - The amount of advances to Kailash Auto Finance Ltd. was only ₹ 43.21 lakhs as noted by the AO and outstanding amount with other company i.e. Kailash Moser Industries Pvt. Ltd. was not indicated in the assessment order – the decision in Commissioner of Income-Tax, West Bengal III Versus Rajendra Prasad Moody [1978 (10) TMI 133 - SUPREME Court] supports assessee - interest expenditure for earning taxable dividend income has to be allowed irrespective of the fact that there was no dividend income earned during this year. The decision delivered by the SC in S. A. Builders Ltd. vs. CIT [2006 (12) TMI 82 - SUPREME COURT] stands applicable in present case - interest on such loan will be allowable as deduction u/s 36(1)(iii), only if such loan has been advanced for purpose of business as a measure of commercial expediency - money was advanced by the assessee firm to its sister concerns and it is not a case of the AO that such money advanced by the assessee firm to the sister concerns were used by the Directors of these two companies for their personal purposes – assessee claimed that money advanced by the assessee f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No.156/LKW/2010. The grounds raised by the Revenue are as under:- 1 (a) The Ld. Commissioner of Income Tax (Appeals)-I, Kanpur has erred in law and on facts in deleting the addition of ₹ 84.93,418/- made by the Assessing Officer on account of disallowance of interest paid by the assessee firm to others and banks without appreciating the facts of the case and material brought on record by the Assessing Officer that the funds advanced to the sister concerns were for business purposes is not true as all the firms/companies (it whom advances were given by assessee) were independent entities and the assessee firm does not have any control over their affairs. Hence the purpose of utilization of funds either for business or non-business purposes cannot be certified by the assessee. 1 (b) In doing so the Ld. Commissioner of Income Tax (Appeals)-I, Kanpur had erred in law and on facts in not appreciating the fact that the argument of the assessee that it has charged interest @12% is not correct particularly because in the aforesaid two cases of sister concerns viz. (1) M/s Kailash Auto Finance Ltd. (2) M/s Kailash Motors (India) Ltd., no interest has been charged by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he details and schedules of the balance sheet filed. Similarly, as per the details of balance sheet there has been an increase of ₹ 2,73,67,261/-from sister concerns' loans. Thus, there is an increase of almost ₹ 7 crores as per the schedule-2 of the balance sheet under the head 'unsecured loans and deposits'. As per the list of fresh public depositors provided vide reply dated 27.6.2005, there are 1551 depositors during the year. As per the details filed and particulars of balance sheet of the year, the assessee has made following investments :- S. No. Nature of investment Total investment Investment during the year (a) Investment in shares of sister Rs.4,58,75,850/- Rs.3,50,60,700/- (b) Advances recoverable in cash/kind (from sister concerns) Rs.8,85,20,483/- Rs.3,00,99,839/- (b) From the clause of partnership deed it may be seen that the assessee does not have any business of sale and purchase of shares. Neither the partnership deed aut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Deposits - 14,97,96,748/- - ₹ 14,97,96,1481/- Average rate of interest paid - 13.21% Out of this, the firm has invested in assets which are not for the purpose of business as under :- Investment in shares of sister concerns (Schedule 10) ₹ 4,58,75,850/- Loans Advances (As per Schedule 6) - ₹ 8,96,41,370/- Less: Advances for business - ₹ 11,20,887/- Add: Debit balance in partner - ₹ 14,46,555/- - ₹ 8,99,67,038/- Rs.13,58,42,888/- On the basis of average interest/average cost of funds worked above, out of total interest debited by the firm in P L A/c., following amount will work out as interest paid for the purpose other than business :- ₹ 13,58,42,888/- x 13.21% =Rs.1,79,44,845.50 However, as per schedule-8 of P L A/c., the assessee has shown interest income of ₹ 94,40,177.27 (including interest from partners am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terials on record, gone through the orders of the authorities below and the judgments cited by both the sides. We find that this issue was decided by the ld. CIT(A) vide Paras 8,9,10 and 11 of his order and the same are reproduced herein below for the sake of reference:- 8. I have considered the facts and circumstances of the case, the reasons noted by AO for disallowance and the arguments of the appellant. It is seen from the facts that the appellant has paid and charged interest only at the rate of 12% contrary to the finding of AO, who, has not considered date-wise calculation but the AO has taken only opening and closing balances for arriving at rate of 13.21%. It also is seen from the facts that the appellant has invested in the shares of the sister concerns companies to the extent of ₹ 1,09,07,650/- in total over past years and ₹ 3,50,60,700/- in the current year. The AO has noted that this investment cannot be said to have been made for the business purpose. The AO has also noted that the investment in shares is not the business activity of the appellant as per its objectives. During the year the appellant has paid interest on the public deposits and borrowin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness connection. The facts show that the part of investment is made in the shares of the sister concerns which are in the same line of business; in the earlier years when the appellant had sufficient profits. The copies of the balance sheet and profit loss account filed for the relevant years shows that the appellant had a net profit of ₹ 34,14,292.31 in the year ended 31st March, 1995, ₹ 45,23,870.87 in the year ended 31st March, 1996, ₹ 11,73,112.84 in the year ended 31st March, 1997, and ₹ 43,05,224.11 in the year ended 31st March, 2003. Thereby, the appellant has stated that there is no nexus between the borrowings and invested funds. Contrarily, it has been reiterated that the investment had been made out of profit of earlier years and investment of ₹ 3,50,00,000/- made during the year is against settlement of old dues and not out of fresh funds. The AO has also noted only ₹ 3,50,60,700/- invested during the current year where as the balance amount of ₹ 1,09,07,650/- relates to earlier years. Considering the facts that the appellant had business profit in the earlier years and in current year major part of the investment is made aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that non charging of interest on loans given by an assessee cannot itself be a sufficient ground for disallowing interest paid by an assessee on loans taken by it in the absence of any nexus between borrowed capital and interest fee advances or in the absence of any finding that borrowed funds or part thereof was diverted towards interest free advances . There is no material brought on record by AO to establish nexus between the investment made by appellant in the shares of a sister concerns and the interest bearing funds borrowed by the appellant. Therefore, the disallowance made by AO to the extent of ₹ 84,93,418/- is not justified. Accordingly, Grounds No. 1 and 2 of appeal are allowed. 9. We find that as per noting of the Assessing Officer in Para 3 of the assessment order, there is investment in shares of sister concerns to the extent of ₹ 4,58,75,850/- including fresh investment in present year of ₹ 3,50,60,700/-. In addition to that, there are advances recoverable in cash or in kind from sister concerns of ₹ 8,85,20,483/- including fresh advances in present year of ₹ 3,00,99,839/-. 10. So far as investment in shares is concerned, dividen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not applicable in the present year because dividend income was taxable in the present year and therefore, no disallowance can be made under section 14A of the Act. In fact, this decision supports the case of the assessee in the present year. Moreover, we have seen that the judgment of Hon'ble apex court rendered in the case of Rajendra Prasad Moody (Supra) also supports the case of the assessee in this year. 14. Hence, in the present year, interest expenditure for earning taxable dividend income has to be allowed irrespective of the fact that there was no dividend income earned during this year. 15. Second judgment cited by the ld. D.R. of the Revenue is the judgment of Hon'ble Karnataka High Court rendered in the case of Pradeep Kar vs. ACIT (supra). This judgment is also not applicable in the present year because this judgment is also in respect of disallowance to be made under section 14A of the Act in respect of expenditure incurred for earning dividend income. Since dividend income was not exempt during this year, this judgment is not applicable in the present year. 16. Now we examine the applicability of judgment cited by the ld. A.R. of the assessee rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee firm to these two sister concerns were used by these two companies for business purposes and this assertion of the ld. A.R. of the assessee could not be controverted by the Assessing Officer or ld. D.R. of the Revenue. Hence, in our considered opinion, this judgment of the Hon'ble Apex Court is squarely applicable in the facts of the present case and respectfully following the same, we hold that no disallowance of interest can be made for making such interest free advances to these two sister concerns. 20. We would also like to observe that interest free advances to these two sister concerns is very negligible in comparison to total advances to sister concerns of ₹ 8,85,20,483/-. For the balance advances to other sister concerns, interest has been charged by the assessee firm though it is the version of the Assessing Officer that such interest was charged at lower rate. In this regard, no finding has been given by the ld. CIT (A) but while working out interest paid by the assessee firm on borrowings, the Assessing Officer has worked out the same on average basis without considering the actual period of borrowing and giving advances. It is the assertion of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the appellant an opportunity. The appellant being prevented by sufficient and reasonable cause, the CIT (A) should ought to have considered the evidences filed before him. 6. Because the addition of ₹ 2,50,000/- upheld by the CITA) u/s.68 is contrary to facts, bad in law against the principles of natural justice and therefore be deleted. 24. It was submitted by the ld. A.R. of the assessee that interest paid by the assessee firm on all these four loans have been allowed by the Assessing Officer and having allowed interest expenditure on these loans, it cannot be said that the loans are bogus. He also submitted that confirmation of all the depositors was furnished and as the depositors were residing out of Kanpur, they could not be produced before the Assessing Officer. It is submitted that under these facts, the addition made by the Assessing Officer under section 68 of the Act and confirmed by the ld. CIT (A) is not justified. He also drawn our attention to page 1 of the paper book and submitted that receipt of ₹ 1.10 lakhs from Mr. Anand Saptak is on account of renewal of old FDRs and therefore, addition of this amount is not at all justified in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of ₹ 50,000/- only, excess claim of deposit of ₹ 50,000/- has to be held as not explained. In respect of this deposit, we are of the considered opinion that addition made by the Assessing Officer is justified because when the depositor is confirming only ₹ 50,000/- out of ₹ 100,000/- shown by the assessee, it has to be accepted that balance deposit was not explained. 30. Regarding third deposit of ₹ 1.01 lakhs from Smt. Satyawati Sanghi, we find that it is noted by the Assessing Officer that no reply was received from this person and therefore, the Assessing Officer asked the assessee to produce this person. Thereafter assessee had submitted reply from this person and confirmation, in which it has been stated by the depositor that only ₹ 31,000/- has been deposited by her. On this basis, the Assessing Officer made addition of balance amount of ₹ 70,000/-. In respect of this deposit also, we are of the considered opinion that addition made by the Assessing Officer is justified because when the depositor is confirming only ₹ 31,000/- out of ₹ 101,000/- shown by the assessee, it has to be accepted that balance deposit was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This could have reduced the interest burden. In this view of the matter, we feel, proportionate disallowance of interest on borrowals is perfectly justified. 2. The Ld. Commissioner of Income-tax (Appeals)-I, Kanpur has ignored the fact that the borrowed fund were also used to purchase shares and hence the interest paid on such borrowings is not allowable expenditure u/s 14A of the Income Tax Act, 1961. 3. That the Ld. Commissioner of Income Tax (Appeals)-I, Kanpur being erroneous in law and on facts, be vacated and the order dated 24.03.2006 passed by the Assessing officer u/s .143(3) be restored. 35. The ld. D.R. submitted that the facts are identical in this year also. He also submitted that there is only one difference in this year i.e. that the dividend income was made exempted and therefore, section 14A of the Act is applicable in this year. 36. The ld. A.R. of the assessee supported the order of the ld. CIT (A). Reliance was placed by both sides on the same judgments cited by them for assessment year 2003-04. Reliance was also placed on a judgment of Hon'ble Allahabad High Court Judgment rendered in the case of CIT vs. Commercial Motors Finance Ltd. In Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... held that if borrowed money is used for acquiring controlling interest in other companies, and the same is in the assessee's business interests, interest on such borrowal is deductible'''. Thus, it can be seen that the business purpose and interest is defined in much wider way than the AO has perceived in this case. It is seen from the facts of the case that all the concerns where the investment has been made are in the business of dealer/hire-purchase, body building and fabrication of motor vehicle and its spare parts. The appellant itself is in the same business since last many years. 14. Under the circumstances and in the light of decisions noted above, it cannot be said that the amounts invested by appellant are for non business purpose, though same may be indirect business connection. The facts show that the investment made in the shares of the sister concerns which are in the same line of business; in the earlier years when the appellant had sufficient profits. The copies of the balance sheet and profit loss account filed for the relevant years shows that the appellant had a net profit of ₹ 34,14,292.31 in the year ended 31st March, 1995, ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant in the sister concerns prima-facie seem to be in the course of business as per business expediency and also that the investment have been made in the earlier years, at the time of available funds/profits in the hands of the appellant. That is to say the nexus between interest bearing borrowed funds and investment made in the shares of the sister concerns is not established as per the facts of the case. I would also refer to the decision in the case of Minakshi Synthetics Pvt. Ltd. Vs CIT (2003) 84 ITD 563 (Lucknow) of the Jurisdictional Hon'ble Tribunal Bench, Lucknow holding that non charging of interest on loans given by an assessee cannot itself be a sufficient ground for disallowing interest paid by an assessee on loans taken by it in the absence of any nexus between borrowed capital and interest fee advances or in the absence of any finding that borrowed funds or part thereof was diverted towards interest free advances . There is no material brought on record by AO to establish nexus between the investment made by appellant in the shares of a sister concerns and the interest bearing funds borrowed by the appellant. Therefore, the disallowance made by AO to the ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the year under consideration. The relevant para of this judgment of Hon'ble Apex Court in the case of Rajendra Prasad Moody vs. CIT as reported in [1978] 115 ITR 519 is reproduced below: What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferent. The deduction of the expenditure cannot, in the circumstances, be held to be conditional upon the making or earning of the income. 40. There was an argument that since no Dividend income was earned during A.Y. 2004 05, no disallowance can be made u/s 14A. Reliance was placed on a tribunal decision rendered in the case of Shivam Auto, which is upheld by Hon'ble Allahabad High Court in ITA No.88 of 2014 dated 5.5.2014. Reliance was also placed on a judgment of Hon'ble Gujarat High Court rendered in the case of CIT vs. Corrtech Energy (P) Ltd. 45 Taxman 116. But this is to be noted that in the present case, disallowance is not made by the A.O. u/s 14A of the I. T. Act alone. The disallowance is made on this basis that it is not allowable u/s 36 (1) (iii) because Investment in shares is not a business of the assessee. Thereafter it is stated by the A.O. that such disallowance is also to be made keeping in view the provisions of section 14A. Here, we would like to observe that whether any disallowance u/s 14A is called for or not is required to be seen only if expenditure is otherwise allowable under a provision of the Act minus section 14A. In fact, section 14A is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nion, the order of learned CIT (A) is not sustainable because deduction u/s 36 (1) (iii) is not allowable on the basis of a business connection. Deduction for interest u/s 36 (1) (iii) is allowable in respect of money borrowed for the purposes of the business. In the facts of the present case, the assessee has failed to establish that interest is incurred for borrowings for business purposes. Hence, we have no hesitation in holding that in the facts of the present case, deduction on account of interest is not allowable under any provision of Income Tax Act and there is no need to take help of section 14A to disallow the interest expenditure. 41. Still, we deal with this contention that no such disallowance u/s 14A is justified because there is no actual earning of the dividend in the present year. We find that in this regard, the judgment of Hon'ble Apex Court in the case of Rajendra Prasad Moody (supra) supports the case of the Revenue because while deciding the issue in respect of allowability of interest expenditure u/s 57(iii), it was held by Hon'ble Apex Court that section 57(iii) does not suggest that the purpose for which the expenditure is made should fructify in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A) is on the basis that in his opinion, the investment made by the assessee in sister concern is in course of business as per business expediency but we have already seen that making investment in shares as a capital asset cannot be said to be in course of business or for business expediency. The second reasoning of CIT (A) is that the investment has been made in the earlier year at the time when interest free funds were available in the hands of the assessee. This finding of CIT (A) is without any basis because as per the copy of fund flow statement available on page NO. 11 of the paper book and as per copy of balance sheet available on page No. 12, we find that even at the end of the year on 31/03/2003 also, there was debit balance in the capital accounts of the partners. Hence, even if there was profit at any point of time, the same was withdrawn by the partners and in fact the withdrawal was more than the contribution of capital and profit of the firm resulting into debit balance in partners' capital accounts and therefore, it cannot be said that at any point of time, own fund was available with the assessee firm for making investment in shares. The fund is available with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnot be certified by the assessee. 1(b) The view of the Ld. Commissioner of Income Tax (Appeals) is not acceptable as in the recent judgment of Hon'ble High Court Kerala in the case of CIT Vs M.M. Nagalinga Nadar Sons reported in (2009) 222 CTR518 (KER), wherein the Hon'ble High Court has held that the assessee which advanced its funds as interest free loans to the partners has no justification to claim interest on borrowals on so much amount. It cannot be denied by the assessee that the funds reaching its hands on maturity of deposits could not be utilized for its own business purposes. This could have reduced the interest burden. In this view of the matter, we feel, proportionate disallowance of interest on borrowals is perfectly justified. 2. The Ld. Commissioner of Income tax (Appeals)-I, Kanpur has ignored the fact that the borrowed fund were also used to purchase shares and hence the interest paid on such borrowings is not allowable expenditure u/s 14A of the Income Tax Act, 1961. 3. That the Learned Commissioner of Income Tax (Appeals)-I, Kanpur has erred in law and on facts in not appreciating the fact that the assessee firm was having ample funds to carr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n into accounts in computing the income of the assessee of the relevant previous year when it was specifically asked for vide order sheet entry dated 10.12.2008 to establish that these debts were actually included in the sales, gross receipt etc while computing the income of the assessee by furnishing documenting evidences in shape of sate bills etc. raised in respect of all these parties- Only filing of list of details of balance debts written off is not itself sufficient evidence, which could prove these are actually the same debts which were already included in sales/receipts in relevant previous year or years. Thus, assessee could not by any piece of evidence show that all are proper debts and are incidental to the business of the assessee for relevant year. 3.3.2 The appellant submits that it had provided details of balances written off. Before me, it has submitted copies of accounts of various parties (with whom regular business had been carried on) to prove that the amounts written off were part of the business transactions. 3.3.3 According, I delete the disallowance of ₹ 4,24,106/- made by the A.O. 52. From the above para from the order of CIT(A), we find t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and has thereby erred in making the said addition. 3. Because the CIT(A) has erred on facts and in law in confirming the additions made under the following heads by the Assessing Officer: (i) ₹ 26,393/- under the head job work charges. (ii) ₹ 2,959/-under the head staff welfare. (iii) ₹ 4,945/- under the head general expenses. (iv) ₹ 16,033/- under the head hire charges/tyre collection charges which expenses having been incurred for the purpose of business should ought to have been allowed. 4. Because the CIT(A) has erred on facts and in law in confirming the disallowance of ₹ 33,933/- being commission/brokerage paid for procuring the fixed deposits, which expenses having been incurred for the purpose of business should ought to have been allowed. 55. Regarding ground No. 1 2 of the appeal, it was agreed by both the sides that this issue is inter-connected with the Revenue's appeal for assessment year 2006-07 as per which this issue has been raised by the Revenue by way of ground No. 1, 2 3 of its appeal. Both sides also agreed that this issue is same as in earlier years' appeals of the revenue. 56. We are of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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